Question

I need a step by step explanation to the following problem in order to make me understand the solution:

14-23 Flexible Budgets and Operating-Income Variance Analysis: Spreadsheet Application

The following information is available for Brownstone Products Company for the month of July:

	Actual	Master Budget
Units	3,800	4,000
Sales Revenue	53,200	60,000
Variable manufacturing costs	19,000	16,000
Fixed manufacturing costs	16,000	15,000
Variable selling and administrative expenses	7,700	8,000
Fixed selling and administrative expenses	10,000	9,000

Set up a spreadsheet to compute the July sales volume variance and the flexible-budget variance for the month in terms of both contribution margin and operating income.

Discuss implications of these variances on strategic cost management of Brownstone.

Configure your spreadsheet so that it will allow the firm to prepare pro forma budgets for activities within its relevant range of operations. Use your spreadsheet to prepare a flexible budget for each of the following two output levels:

3,750 units

4,150 units

Answer 1

1)

	Actual	Flexible Budget Variance	Flexible Budget	Sales Volume Variance	Master Budget
Units	3,800	0	3,800	200         U	4,000
Sales	$53,200	$ 3,800 U	$ 57,000	$3,000   U	$60,000
Variable costs:
Manufacturing	$19,000	$3,800    U	$ 15,200	$800       F	$16,000
Selling & admin.	$7,700	$100        U	$   7,600	$400       F	$8,000
Total variable costs	$26,700	$3,900     U	$22,800	$1,200    F	$24,000
Contribution margin	$26,500	$7,700     U	$34,200	$1,800    U	$36,000
Fixed costs:
Manufacturing	$16,000	$1,000      U	$15,000		$15,000
Selling & admin.	$10,000	$1,000      U	$9,000		$9,000
Total fixed costs	$26,000	$2,000      U	$24,000	$0	$24,000
Operating Income	$500	$9,700      U	$10,200	$1,800    U	$12,000

Sales volume variance:

        Contribution margin variance = $ 36,000 - $ 34,200 = $ 1,800 U

          Operating income variance = $ 12,000 - $ 10,200 = $ 1,800 U

Explanation:

Budgeted manufacturing variable cost per unit = $ 16,000/4,000 = $ 4

Budgeted manufacturing variable cost for 3,800 units = $ 4 x 3,800 = $ 15,200

Budgeted Selling & admin variable cost per unit = $ 8,000/4,000 = $ 2

Budgeted Selling & admin variable cost for 3,800 units = $ 2 x 3,800 = $ 7,600

Total budgeted variable cost for 3,800 units = $ 15,200 + $ 7,600 = $ 22,800

Contribution margin = Sales – variable cost

Actual contribution margin for 3,800 units = $ 53,200 - $ 26,700 = $ 26,500

Budgeted contribution margin for 3,800 units = $ 57,000 - $ 22,800 = $ 34,200

Budgeted contribution margin for 4,000 units = $ 60,000 - $ 24,000 = $ 36,000

Operating income = Contribution margin – fixed cost

Budgeted operating income for 3,800 units = $ 34,200 - $ 24,000 = $ 10,200

Actual operating income for 3,800 units = $ 26,500 - $ 26,000 = $ 500

Budgeted operating income for 4,000 units = $ 36,000 - $ 24,000 = $ 12,000

2)

As a part of competitive strategy the company has bring down the price to $ 14 from $ 15. But the company does not have actual control on its operating cost which results in to such unfavorable variances for manufacturing and selling & administrative expenses. This surplus cost reduces the flexible-budget operating income of the period by 95 %. In order to compete successfully as low-cost producer the company should get control over the excess expenses.

Again the company has unfavorable selling-price and sale-volume variance. Budgeted sales volume is not achieved. Competitive reduced sales price strategy was unable to accomplish expected sales level.

3)

	Flexible Budget	Flexible Budget	Master Budget
Units	3,750	4,150	4,000
Sales	$ 56,250	$ 62,250	$60,000
Variable costs:
Manufacturing	$ 15,000	$ 16,600	$16,000
Selling & admin.	$ 7,500	$ 8,300	$8,000
Total variable costs	$ 22,500	$ 24,900	$24,000
Contribution margin	$ 33,750	$ 37,350	$36,000
Fixed costs:
Manufacturing	$15,000	$15,000	$15,000
Selling & admin.	$9,000	$9,000	$9,000
Total fixed costs	$24,000	$24,000	$24,000
Operating Income	$9,750	$13,350	$12,000